Relative to its economy, Sweden’s private equity industry is one of the most significant in Europe.
According to the European Venture Capital Association’s annual survey of pan-European private equity and venture capital activity, in 2003 the level of Sweden’s private equity investment as a percentage of GDP was the second highest in Europe. It reached 0.380%, second only to the UK, and well above the European average of 0.288%.
Despite the misery of the past few years, total private equity investment in Sweden is increasing sharply. According to the same survey, the total funds raised in Sweden for private equity grew to e2.2bn in 2003 from e642m the previous year, an increase of around 243%.
“Private equity investment is typically carried out by the larger pension funds,” says Jan Bernhard Waage, managing director of Wassum Investment Consultancy, the Hewitt affiliate in Stockholm. “The state (AP) funds, for instance, typically invest 2-4% of their portfolio in private equity, out of a 10% allocation to alternatives. They do this using a combination of direct investments in private equity funds, funds of funds and investment trusts or companies.”
However, it is only recently that these state pension funds have opened up to private equity investment. Previously, only a couple had been allowed to invest in this sector. But the AP system was reformed about two years ago, allowing all of them to get exposure to private equity. Even so, the AP1 state pension fund is only now starting to enter the sector, and is tendering for private equity partners.
“We used to be a fixed income manager, and we have taken more time to get into private equity than other funds,” says Nadine Viel Lamare, an AP1 spokesperson. The fund has a 3% allocation in alternative investments in its strategic benchmark, but has so far invested only in Swedish property. “We are building a private equity portfolio in order to acquire a long-term risk-adjusted return, compared with other assets, as well as for diversification,” says Viel Lamare. “The fund started in 2001 and has just about broken even over the entire period.”
AP1 will not invest via funds of funds, but is looking to make strategic private equity partnerships with one or more companies, with the aim of investing next year.
Of the e16bn fund, around e320m will be invested in private equity. There will be three separate investment mandates – Europe, US and global. The e320m will be divided between the three partners, with each manager running between e80m and e160m. AP1 hopes to have selected managers by the end of this year.
The two other main types of fund – company schemes and private funds run by life assurance companies – are at a different stage in their development.
“Corporate pension funds have not really seen any increase in allocation to private equity over the past two years,” says Waage. “As a whole, most of the big players are already there, so there won’t be a lot of new money to come from them. However, some of the medium to smaller players will become less scared if private equity bounces back as it seems to be doing, so they may come into the market.”
Waage also points to a recent trend among life companies. “Some are moving towards setting up their own investment arm on the same lines as ATP in Denmark,” he says. “Skandia, for example, invests directly, using its own staff to pick individual companies, but this is time-consuming and difficult. So they have been trying to move their portfolio out of direct investment by creating their own funds and outsourcing the management. That means the focus is more on asset allocation rather than individual companies. In fact, most of the large players these days are concentrating on achieving diversification through suitable asset allocation.”
This development is part of a wider pattern says Conni Jonsson, founder and managing partner of EQT, the largest buyout fund in the Nordic region. (The other two major investment managers are Industri Kapital and Nordic Kapital.) “The fund route is now chosen overwhelmingly in preference to investing directly in companies,” Jonsson says. “These days, pension funds themselves tend not to make direct investments in companies – everyone did it in the 1980s and 1990s but they have realised it is very hard.”
In terms of stage of development, he says that the later stage deals are the most important for Swedish pension funds. Although they invest in venture, the venture funds themselves are not very big, so this involvement is not particularly significant.
“Locally, the start-up market is very poor,” says Jonsson. “However, there is a very well-developed buyout market. Sweden has also seen some secondary buyouts as well as mezzanine financing, including the Nordic Mezzanine fund.”
The figures for private equity as a whole bear him out: according to the EVCA survey, last year 93% of all the capital raised in Sweden was allocated to buyout funds and only 7% to venture capital funds.
Jonsson says that as a whole the allocation by Swedish pension funds to private equity is growing, from both newcomers and the larger funds which have been doing this for many years. “The allocation is increasing because they are getting good returns,” he says. “Most of them start domestically because they are acquainted with the local market, but as they acquire more exposure, they go global.”